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Texas – Lessor Liable for Accelerated Taxes When it Assigned Lease

SALT Report 2910 – A Texas Administrative Law Judge issued a ruling regarding a Taxpayer’s request for a refund of sales tax that was paid to the Department in error. The Taxpayer in this case, provides capital for customers that wish to purchase new and used business equipment. Generally, the Taxpayer will enter into an operating lease with those customers and then it will assign that lease to a third party.

In 2010, the Comptroller audited the Taxpayer for sales and use tax and determined that the Taxpayer failed to accelerate and collect the sales tax that was due at the time the lease was assigned as required by 34 Texas Administrative Code Section 3.294(h). As a result, the Comptroller issued a Texas Notification of Audit Results that consisted of unpaid taxes, penalties, and accrued interest.

The Taxpayer filed an appeal and conceded that Rule 3.294(h) applied to these circumstances. The Taxpayer also agreed that when it assigned its right to receive lease payments to the third party it should have reported the tax due on the remaining lease payments. However, the Taxpayer argued that it should be allowed to offset its liability with the sales tax that was collected and remitted by the lease assignees.

Upon review of the case, the ALJ stated that under Rule 3.294(h) assignees of a lease payment are not required to remit tax on those lease payments, and any tax they collect and remit on those lease payments are considered taxes paid in error. Therefore, the right to claim the erroneously paid tax belongs to the lease assignee and not to the Taxpayer who assigned the lease. Consequently, the ALJ ruled that the Taxpayer is not entitled to a credit against the assessed tax liability for taxes collected and remitted in error by its assignee.

Additionally, the Comptroller stated that in order to receive a credit for the tax that the lease assignees remitted, the Taxpayer must first obtain and submit refund assignments from the lease assignees.